Personal finance expert Dave Ramsey has given a lot of advice on purchasing a home, which isn't surprising, given the huge cost of buying a property.
But while some of his advice is good -- such as making sure you don't spend too much of your income on a house -- two of his key suggestions could end up backfiring and leaving you worse off.
Here's the Ramsey advice most people should steer clear of following when investing in real estate.
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Pay cash for your house if you can
Dave Ramsey has repeatedly advocated paying cash for a home. He refers to this as the 100% down plan. This isn't out of character for Ramsey, as the finance guru has made it his mission to encourage consumers to give up borrowing so they can build wealth instead of making monthly payments.
The issue, of course, is that paying cash for a home would mean tying up a huge sum of money in a very illiquid asset -- and giving up the higher returns the money could likely earn elsewhere.
Homes can be difficult to sell, especially during an economic downturn when you may need the money the most. It takes time to find a buyer, and there are high transaction costs.
Because mortgage rates remain affordable even as they've been rising, paying cash for a property means giving up the chance to invest large amounts fo money that could easily earn much more in an investment account even with low-risk investments.
Waiting to buy a house until you can afford to pay for it in cash could also result in a substantial delay in the time it takes to become a homeowner. During that time, you'd be spending money on rent rather than building equity. And you'd miss out on any property appreciation that occurred.
Rather than tying up so much money when buying a property, almost everyone is better off making a 20% down payment, searching for an affordable mortgage, and buying a home once they can afford the loan payments and have some emergency money set aside.
Take out a 15-year mortgage if you must borrow
Ramsey recognizes that the 100% down payment plan is likely out of reach, and for those who can't afford to pay cash, he suggests taking out a 15-year mortgage. Unfortunately, this isn't ideal either.
A 15-year mortgage comes with much higher monthly payments than its 30-year counterpart, even though the interest rate is usually lower. If you were buying a $300,000 house and borrowing $240,000, a 30-year mortgage would come with a principal and interest payment of $1,150 at a 4.027% rate. But a 15-year loan for the same amount would cost $1,691 in principal and interest per month even if you were able to borrow at just 3.293%. You'd have to pay an extra $541 per month.
Now, your total mortgage costs at the end of a 15-year mortgage would be just $304,457 compared with $413,833 with the 30-year loan. But if you'd opted for the 30-year loan and invested the $541 saved on monthly payments during your first 15 years of repayment, you'd end up with around $206,000 in your investment account (assuming a 10% average annual rate of return, which the S&P 500 has historically produced). This would more than cover the $109,376 in extra interest on the 30-year loan that accrues over time.
And that doesn't even take into account any mortgage interest deductions you claim, or any extra tax savings you're able to enjoy if the cheaper mortgage allows you to put more money into a 401(k), individual retirement account, or other tax-advantaged investment accounts.
Ultimately, Ramsey's advice on how to finance your home can cost you in the end. Rather than trying to take out a shorter mortgage or avoid a home loan altogether, you should seriously consider sticking with the standard 30-year mortgage when buying property.
